Although it is a commercial property case, Freifeld v West Kensington Court Ltd [2015] EWCA Civ 806, is of interest and relevance to residential landlord and tenant law as well, as the Court of Appeal grapple with the approach to be taken to granting relief from forfeiture in the case of intentional breaches of covenant, in particular, where the leasehold interest still has significant value.

The appellants were the leasehold owners of a commercial lease of seven retail units. The Respondents were the freeholders. The lease was for a term of 99 years from 1982 and, unusually, no rent was payable by the appellants to the respondents under the lease. The lease contained a covenant against sub-letting without the consent of the respondents (such consent not to be unreasonably withheld). On any view, the commercial lease was a valuable asset, with the seven units generating a rent of around £130,000 p.a.

The problems begin in December 2011, when the apellants granted a (further) lease of one of the commercial units to a restaurant. There had been problems with noise and similar from the restaurant for some time and it seems likely that, if consent had been sought for this sub-let, the landlord would (reasonably) have refused (or, at least, conditions imposed). So the appellants did not seek consent, but went ahead and granted the new lease. In April 2012, the landlord found about the lease. The appellant admitted that it was in breach of covenant and sought retrospective consent, which the landlord refused. In May 2012, the landlord started forfeiture proceedings by serving a s.146 notice.

At trial, the breaches of covenant were proved and the real issue was whether or not to grant relief. The Judge made scathing findings about the appellants and their attitude, which are worth setting out in full:

109. In short, I find that Mr Freifeld, acting for himself and his wife, took a conscious and deliberate decision to grant the future lease to Mr Ding and Ms Yang on 8th December 2011, since when he has wilfully failed to take any steps to remedy that breach by procuring or taking steps to procure surrender of the future lease, at any rate until mid-way through trial on the evening of the 12th November 2013. He also failed to inform, and concealed from [the respondent], the fact of that grant leaving it up to [the respondent] to find it out for itself which it ultimately did on 17th April 2012 when inspecting the Land Register, causing the section 146 notice to be issued on 15th August 2012, by which time these proceedings had been issued without any reference to the unlawful grant of the future lease. . . .

113. In acting in the way they have, it seems to me and I find that the Freifelds demonstrated a cynical disregard for their own obligations under their lease and also for the very real and longstanding problems which had been encountered by [the respondent] for many years in respect of the Chinese restaurant. I was not at all satisfied that Mr Freifeld gave a true and full account of precisely why he had agreed to grant the future lease at the time when he did. . . .

In the light of these findings, the Judge considered that the appellants would have a “… vertiginous, but not necessarily impossible, climb up to the peak of relief from forfeiture”. Suffice to say, the appellant did not even manage to leave base-camp on this climb. Relief refused.

A further application for relief was then made, on the basis that the respondents would make an enormous windfall from forfeiture, which could be avoided if relief were granted on terms that the appellant sell the lease. The Judge rejected this application as well, finding that the lease had very little (if any) value, since he had refused relief from forfeiture.

And so, off the Court of Appeal we go. The first issue was whether the Judge had been entitled to take such a strict approach to relief, simply because the breach was deliberate. The parties were ad idem that there was no “special circumstances” rule for deliberate breaches, i.e. a deliberate breach was not in itself less likely to result in relief being granted. Everything turned on the factual circumstances (see Southern Depot Co Ltd v British Railways Board [1990] 2 EGLR 39).

The value of the leasehold interest was also important. Here, the Court of Appeal reminded everyone that the purpose of a forfeiture clause is not to secure a windfall for a landlord, but to give a method of enforcing compliance with covenants (see, e.g. Shiloh Spinners Ltd v Harding [1973] AC 691). Thus, the proportionality of the harm to the tenant if forfeiture was refused had to be considered.

It was here that the Judge had gone wrong. He was perfectly entitled to make the findings of fact which he had and was more than justified in criticising the conduct of the appellants, but what he had not done was consider the proportionality of refusing relief. His view had been that the appellants were simply reaping what they had sown. But the purpose of forfeiture, i.e. securing compliance with the covenants, could have been met by granting relief on terms that the tenant sell the lease to someone who would comply. Furthermore, he was wrong to value the lease at “nill” simply because he had refused relief. If he granted relief on terms, then it retained its value.

Those errors meant that the Court of Appeal could exercise the discretion afresh and, for various case-specific reasons, decided to grant relief on terms that the appellants sell the lease within 6 months, with the parties left to sort out some of the details (e.g. sale by auction?).

Lord Justice Briggs, in a short concurring judgment, was at pains to stress that tenants should not see this as guaranteeing them a right to relief. In some (unspecified) cases, it may be that the value of the leasehold interest should be lost to the tenant and the landlord obtain a windfall. It would always be a question of what was needed to secure compliance with the covenants.

Comment

This is, I think, a helpful little case for two reasons. First, it reminds us that the purpose of forfeiture is to secure compliance with covenants, not to punish or cause a windfall gain. Secondly, despite the caveat from Briggs LJ, it does seem to suggest that, in reality, forfeiture really is on its last legs. Imagine a 999 year lease of a flat – is the only way to secure compliance with the covenants to forfeit it? You’d need a pretty compelling case to do so, I’d have thought.